Employer On-Costs Explained (2026/27): NI, Pension, Holiday & Overheads

What are employer on-costs?

Employer on-costs are all the costs that sit above an employee's gross salary — the amounts the employer pays on top of, or in addition to, the salary itself. The main components are employer National Insurance (NI), employer pension contributions, and overhead costs such as office space, equipment and management time.

Understanding on-costs is critical for workforce planning, budgeting and evaluating the true return on a hire. A £35,000 salary does not cost £35,000 — it typically costs £38,000–£42,000 depending on pension rate and overhead assumptions.

Employer NI — the largest on-cost for most employers

From April 2025, employer NI is charged at 15% on all earnings above the secondary threshold of £5,000 per year (£416.67 per month). This is the largest mandatory on-cost for most employers.

At a £35,000 salary: employer NI = (35,000 − 5,000) × 15% = £4,500 per year (£375 per month). At £50,000: employer NI = (50,000 − 5,000) × 15% = £6,750 per year (£562.50 per month). These figures represent employer liability only — employee NI is separate and deducted from the employee's pay.

Employment Allowance can reduce employer NI by up to £10,500 per year for eligible employers. Eligibility requires that total employer NI liabilities were below £100,000 in the prior tax year and the employer does not employ any single person who is a director of a limited company with no other employees.

Pension contributions and other on-costs

Auto-enrolment requires employers to contribute a minimum of 3% of qualifying earnings (£6,240–£50,270 for 2026/27). At £35,000, the qualifying earnings band gives £28,760 in pensionable pay, and 3% employer contribution = £862.80 per year (£71.90 per month).

Other on-costs vary by employer but typically include: employer liability insurance, recruitment costs (job board fees and agency fees of 10–20% of salary for permanent hires), IT equipment (£500–£2,000 per employee), office space, and management overhead. A common rule of thumb is to add 10–15% of salary as a blended overhead allowance. This gives a total cost-to-company at £35,000 of approximately £38,000–£42,000 per year.